Amazon Maintains Cloud Lead, Could Go after Enterprise, Says Evercore

By Tiernan Ray

Evercore Partners’s Ken Sena today reiterates an Overweight rating on shares of Amazon.com (AMZN) writing that investors shouldn’t be worried about continued price competition in cloud computing services as the company battles Google (GOOGL), Microsoft (MSFT) and others, because, as he puts it, “the price cuts are manageable, that AWS’s competitive position is secure, and the opportunity remains large.”

Sena reviews the recent price chopping activity:

2014 has seen renewed efforts by AWS competitors to compete on the basis of price. For instance, earlier this year Google dropped its prices of compute and storage, 32%, 68%, respectively, for an average rate decrease of 50%. This compares to just 6% pricing cut by Google in 2013, according to Right Scale. Meanwhile, Microsoft Azure also responded with a 50% cut to its prices, the first time we recall seeing GCE and Azure pricing cuts outpacing Amazon’s, which we estimate to have decreased by closer to 40% across compute and storage.

For those of you playing at home, here’s a visual guide to those cuts (click for larger image):

Sena also notes Google is adding capacity fast, outspending Amazon:

In addition to aggressive price cutting, Google has been building out raw capacity, as data center expansion is reported to be making up the majority of its recent capex spend acceleration. Specifically, capex as a percentage of Google’s revenue has ticked up from 5.7% in 1Q12 to a peak of 23.6% as of 4Q13, though it did taper modestly in 1Q14 to 15%. Framing this in the context of y/y increases in spending on an absolute basis against Amazon, we see Google has had at least double the incremental spend in capital expenditures in every quarter since 1Q13. Moreover, incremental Capex spend for Google is running at least 2x Amazon’s over the past five quarters.

Still, Amazon remains much larger than Google and the rest, by capacity:

When looked at on the basis of capacity (as opposed to revenues), Amazon has more than five times all the other cloud IaaS providers combined, which includes Microsoft, Google, IBM SoftLayer, Verizon Terremark, Rackspace, VMware, HP, GoGrid, Joyent, Dimension Data, CSC, Fujitsu, Virtustream, and CenturyLink (Gartner source). In addition, on the basis of revenues, AWS still has over three times the scale of Azure, Google, and Rackspace.

Sena sees Amazon having held share with its own price cuts:

AWS dropped prices on AWS 13 separate times over 2013, flat with 2012, but still equal to the number of reductions by Azure, Google, and Rackspace, combined. These continuous pricing cuts have helped Amazon stay a step ahead of their competition, allowing it to gain share in the marketplace. This has led to Amazon increasing share from 24% in 2010 to 39% of the IaaS market according to Gartner by 2013.

Amazon’s leading in the market by more than just price, but also by quality of its service, he maintains, drawing on Evercore’s discussions with customers at a reason symposium:

We also note that several AWS customers at Evercore’s Vertical Cloud Symposium last week (hosted by Kirk Materne) cited AWS’s security, support and deeper industry capabilities (e.g., compliance and regulation) as reasons to choose AWS over the competition. The day centered on the idea of industry verticalization within cloud, such that the ecosystem to support the infrastructure is becoming increasingly important. Companies such as Infor cited AWS’s ability to deliver beyond pricing in areas such as compliance and regulation so that Infor can focus more on the customer-facing aspects of its products. We see these elements as driving stickiness to AWS’s platform well beyond the pricing of pure compute.

And Sena thinks Amazon can take a chunk out of traditional IT spending:

Finally, and most importantly, while Infrastructure-as-a-Service stands at about $9 billion as of last year according to Gartner, the broader marketplace in which AWS competes is closer to $172 billion, which encompasses app development, IT operations, security, and virtualization. Aggressive price cuts to bring more customers on board for infrastructure needs helps drive marketplace demand for software infrastructure and services through this channel, through which AWS is exceedingly well positioned.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.